Slightly diluted GST is a better idea than current system of indirect taxes

May, 08th 2015

The Lok Sabha has passed a vital legislation to introduce a country-wide goods and services tax (GST) that would take India closer to being a unified market. A common national market is central to India’s ambition of becoming a manufacturing powerhouse and turn more investor-friendly. From energy shortages and land problems, a barrage of hurdles have kept away private investment in what should otherwise count as a massive, attractive market.

There are abundant examples that show how economies that showed potential eventually fell off because of the absence of bipartisan support to critical important policies to create jobs and push income growth. Wider consultations, as in the case of tax reforms, assist in expanding the area of the possible.

That said, a bipartisan and collaborative approach is imperative to yield the desired benefits. The GST is a case in point of how lack of political collaborative thinking had been holding up an ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states. The GST’s implementation has faced political hurdles as states fear it could rob them of discretionary fiscal powers, and reduce revenues.

The government’s acceptance of the recommendations of the 14th Finance Commission increasing the share of states in the Centre’s tax revenue from the current 32% to 42% should serve as a confidence-building measure. From the Centre’s point of view the greater transfer of funds and the resultant fiscal empowerment could well be the grand bargain for rolling out the GST.

Over the recent years, the world has been peering curiously at the stuff bubbling in India’s policy laboratory. Quick decision making and speedier implementation are vital to turning around the Indian economy, which, until recently, was an engine for global growth. The GST in its current form may have a few design flaws. For instance, for long petroleum products have remained milch cows for state governments. That status remains unchanged, at least for now.

Likewise for tobacco and alcohol. Moreover, an additional 1% tax has been imposed to compensate the so-called “producing states”. From a pure conceptual framework, these flaws run against the very idea of a common national market. But, for how long can India avoid the roll-out in its quest for an ideal GST model? A slightly diluted GST is still a better idea than the current system of indirect taxes, which is mired in a web of levies that have caused red-tape, confusion and corruption. The rough edges can be smoothened out as the system gets moving.